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Unformatted text preview: nd with similar payments issued by a firm with
the same risk. The straight bond value is typically the floor, or minimum, price at
which the convertible bond would be traded. The straight bond value equals the
present value of the bond’s interest and principal payments discounted at the
interest rate the firm would have to pay on a nonconvertible bond.
Duncan Company, a southeastern discount store chain, has just sold a $1,000par-value, 20-year convertible bond with a 12% coupon interest rate. The bond
interest will be paid at the end of each year, and the principal will be repaid at
maturity.11 A straight bond could have been sold with a 14% coupon interest
rate, but the conversion feature compensates for the lower rate on the convertible. The straight bond value of the convertible is calculated as shown: Year(s) Payments
(1) Present value interest
factor at 14%
(2) Present value
(3) 1–20 $ 120a 6.623b $794.76 1,000 0.073c 73.00
$867.76 20 Straight bond value
a $1,000 at 12% $120 interest per year. b Present value interest factor for an annuity, PVI...
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- Fall '13